.• .__ •. !';'-..

DRAFT

Workshop Version 1.0 

## Vertical Axis Baseline Clothes Washer Manufacturing Cost Assessment Phase I Preliminary Report

Preparedfor: U.S. Department of Energy February 24, 1998

Arthur D. Little, Inc. Acorn Park Cambridge, MA 02140-2390 Reference 35539

### ... Go; '.r ·'**~** DRAFT 

### Table of Contents
1.0 Program Status.....................................................................................................1 1.1 Program Objective
......................................................................................1 1.2 Phase I Objectives
......................................................................................1 

### 2.0 Assumptions.........................................................................................................2 2.1 Baseline Definition
......................................................................................2 2.2 Manufacturing Assumptions
........................................................................2 2.3 Conventions for Manufacturing Cost Estimates
..........................................3 3.0 Approach................................................................................................................4 3.1 Bill of Materials (BOM)
................................................................................4 3.2 Fabrication Processes
................................................................................5 3.3 Assembly Processes
...................................................................................7 4.0 Preliminary Results..............................................................................................7 5.0 Variability and Uncertainty in Manufacturing Cost..........................................10 5.1 Key Parameters
........................................................................................1 O 5.2 Sensitivity Analysis
...................................................................................11 5.3 Monte Carlo Simulation
.............................................................................15 6.0 Conclusion and Phase II Program Plan
............................................................16

Workshop Version 1.0DRAFT

1.0 Program Status Vertical Axis Baseline Clothes Washer Manufacturing Cost Assessment Phase I - Preliminary Report

This is a preliminary report ofthe Phase I program. Manufacturer visits and data collection have not been fully completed at this time; this report will be updated as appropriate to reflect any new information that is collectedbefore the March 11-12 Workshop.
1.1 Program Objective The main objective ofthis projectis to quantify the differential manufacturing costs of producing high efficiency clothes washers based on (1) a proprietary Vertical-axis (V

- axis) design, and (2) a commercially available Horizontal-axis (H-axis) design. The overall projectconsists oftwo phases: Phase Iprovides a detailed and objective costestimate ofa state-of-the-art, high volume, Y-axis washer as a baseline for further analysis. The major objective ofthis phase is to obtain stakeholdercomments on the costing methodology and baseline costs. PhaseIIdevelops a differential cost estimate for the proprietary**V-.~is** design and for a commercially available H-axis clothes washer, relative to the baseline clothes washer evaluated in Phase I. This report describes thepreliminaryresults of Phase I . Several manufacturing plant visits providedcritical input into its preparation, and additional visits will beconducted before its completion. Otherelements ofthe programyet to be completed include additional process equipment and supplierinterviews, sensitivity analysis on critical cost parameters, and incorporation ofstakeholder suggestions/modifications. An updated version ofthis document will be available for review priorto the March workshop.
1.2 Phase I Objectives

• Develop a clear and consistent manufacturing cost assessment methodology for clothes washers. • Provide a detailed manufacturing cost for a high production volume "typical" clothes washerfor abaseline estimate. • Report the results ofthe analysis in a way that preserves confidentiality ofdata. • Obtain inputfrom all stakeholders as to the validity ofthe methodology and on the "reasonableness" ofthe baseline manufacturing cost estimates.
Workshop Version 1.0 1·--. DRAFT 2.0 Assumptions 2.1 Baseline Definition Two clothes washers were selected to be used in the baseline cost assessment. They are among the top selling machines as reported in sales data obtained from the ELCAP service. Two machines were disassembled, rather than one, in orderto reflect product differences between manufacturers in the baseline vertical axis washer, and to then aggregate the actual componentcosts to maintain confidentiality. Eachclothes washer was analyzed and the costwas estimated separately. The costs were then averaged at the sub-assembly level and by category. Since different manufacturers have significantly different designs, sub-assemblies are defined by function (i.e., suspension, tub andbasket, transmission and motor, etc.) ratherthan by specific components. In Phase II, the differential costs will be calculatedby estimating the costs ofthe proprietary Vertical-axis (V-axis) design, and a commercially available Horizontal-axis (H-axis). This cost estimate will be conducted on an add and omitbasis using each baseline vertical axis machine. Fromthese analyses, a differential costwill be generated for each baseline and design option and then the results will once again be aggregated by category and subassembly. Each machine will also be tested to obtain its energy consumption, according to DOE test procedure, Appendix Jl. The following is a list ofthe key characteristics describing the baseline clothes washers: Baseline Clothes Washer Characteristics: • 27" overall width • 3 wash/rinse temperature settings • Unheated rinse • 3 Settings for Load Size • 2 wash/spin speeds • 8 ormore wash cycles • Supercapacity wash basket 2.2 Manufacturing Assumptions Key assumptions used in the Phase I manufacturing cost assessment include:
• An annual clothes washerproduction volume of 1.5 million units. Note: future analyses will include separate baseline costestimates for a smaller and larger volume manufacturer. • Capacity utilization at 100percent. (Sensitivity to capacity utilization will be conductedin order to understand the impact on the baseline cost.) • Investment for a "greenfield" site, including all new equipment, tooling, installation, and building. • Full orsemi-automation ofthe manufacturing facility for major fabrication processes (painting, stamping, welding, etc.). Workshop Version 1.0 2" DRAFT

• Manual final assembly to reflect the need for flexibility in production ofmultiple models. Itis understood that the cost ofspecific models-or individual manufacturers-will vary from this baseline, depending on elements such as the product's precise characteristics, actual manufacturing processes, and the productmix in the factory (multiple clothes washer and dryerproducts). Also there are considerable differences in the levels of vertical integration as some manufacturers preferpurchasingpartially complete subassemblies to manufacturing themselves. However, as this set ofassumptions will remain constant for the Phase II analysis, the differential cost estimation methodology reduces the impact ofplant-specific characteristics.
2.3 Conventionsfor Manufacturing Cost Estimates. The cost categories used to summarize the manufacturing costs developed in Phase I closely parallel the cost categories used in the AHAM data collection. Directmaterial, direct labor and overhead (including investment depreciation) comprise the full production costs. Othercostelements (SG&A, R&D, interest, etc.) are grouped under the non-production costcategory. Together these costs make up the full cost ofthe product as shown in Figure 1. The manufacturing cost assessment will develop the full production costestimates. Non-production costs will be added based on a top-down analysis ofindustry structure.

Full Production Cost 1 Direct Labor Direct Material Overhead

. Indirect labor Selling

..... I Mkt. research Non-Production Cost General &

Admln.

! ; Costs of i service & R&D , 

### ...,..,...._ __,!

..... I

: Costs : associated Interest 

## l ..,_.

# _ __,, l.. - -·- _.J**r-~--** 1Costs [of i Advertising Indirect Material · staff units 'with efforts iborrowing ! · Maintenance ; POS promotion : Depreciation : Sales person Taxes : comp. + travel

· Insurance related I logistics : to assets : • Warehousing

. • Dellvery : ·Record 

## ! keeping • Order entry/ l
...**~r":.8-~lng** _ _ J to find new Jfunds ·General ; corporate

. costs ·comp. etc.

1 Tax Reform Act of 1986, essentially, requires companies to measure cost of goods sold as the full production cost of the goods sold. Figure 1. Full Product Cost Workshop Version 1.0 3;_ DRAFT 3.0 Approach The manufacturing cost assessment methodology used is a detailed, component-focused, activity basedtechnique for rigorously calculating the manufacturing cost ofa product (direct materials, direct labor and some overhead costs). This methodology has been successfully applied by Arthur D. Littleto products at various stages ofdevelopment, from early R&D to production. Figure 2 shows the three major steps in generating a baseline manufacturing cost. Raw 

### Fabrication Finished Materials Materials



## - Processes 

# - - - Assembly Bill of Materials Purchased Parts 

### Processes 

# -
- Figure 2: Manufacturing Cost Assessment Approach
3.1 Bill of Materials (BOM) The first step in the baseline cost assessment was the creation ofa complete and structured bill ofmaterials from the physical tear down oftwo high volume vertical axis clothes washers. To conduct the tear down, two vertical axis clothes washers were purchased and completely dismantled. Eachpart was then characterized according to weight, dimensions, material and quantity. A separate BOMfor each clothes washer was created. The BOMincorporates all materials, components, and fasteners with estimates ofraw material costs orpurchasedpartcosts, as appropriate. Assumptions on the sourcing of parts and in-house fabrication were based on previous industry experience, recent information in trade publications and discussions with major clothes washer manufacturers. To improve ourunderstanding ofthe industry's currentmanufacturing practices, interviews and plant visits were conducted at major clothes washer manufacturing facilities. We anticipate that three visits will be completedprior to the March workshop and additional visits will be scheduled as necessary. These visits focused on observing and characterizing currentmanufacturing practices for the majority ofthe parts in the baseline clothes washers. Forinternally fabricated parts, manufacturing processes were identified on the BOM for eachcomponent. Costestimates for raw materials and purchased components were drawn from ArthurD. Little's manufacturing databases and supplemented with information obtained from manufacturer and supplier sources. Adjustments to the costestimates for purchasedparts and raw materials were made, as appropriate, to include price discounts typically available at the purchase volumes in question. Figure 3 is a section from the structured bill ofmaterials ofonebaseline clothes washer. This section ofthe structured bill of Workshop Version 1.0 4i, DRAFT materials lists the partnumber (arbitrarily defined during disassembly), description, material category, sourcing category (fabricated orvended), quantity, dimensions, weight, percent ofscrap in processing, and estimated material cost.

1.00 I I I !Tub 8t BasketAssembly Part Final aSl 1388.00 v OD or Weight (lbs) Scrap No. Descriotlon 1800.00 Catel[ory ? 

## • Width Thlm88 Lenl[th Steel Other % 1.01 Tub Plastic l 22.5 0.09 22.5 5.520 ·'· ,**~-** 1.03 Water Level Box Plastic l 2.75 0.085 1.75 0.066
... 1.02 Tub to Susoenslon Seal Rubber l 2.6 0.3 1.225 0.066 1.07 Bleach tube Rubber l 0.6 0.09 5.2 0.036 ' ' 1.30 Basket Assv l.201 Bosket Enomld Steel I I l I 20.5 I 0.055 I 18 I 13.500 I I 15% I 1.221 Lint Collector Plastic I I l I I I I I 0.475 I I l.211 Bosket Bolonclno Rina w/Woler In II Plosllc I I 1 I 20.5 I 0.09 I 2 I I 1.400 1.· I 1.49 UooerAaltatcirAssv l.SOA Fabric Dispenser - Top Plastic l 3.81 0.05 1.6 0.108 I.SOB Fobrlc Dispenser - Cup Plosllc l 3 0.05 5.5 0.074 I.SOC Fabric DlsPenser - Bottom Plastic l 4 0.06 5 0.148

1.51 Clutch Cover Plastic 1 3.25 0.05 0.9 0.030 ' 1.52 Clutch Cover Seal Rubber l 3.15 0.16 0.010 l.75 LowerAaltatorAssv 1.60 Bottom Aoltotor Beorlno Plastic l I 2.95 0.26 0.016 1.59 Bottom Aallalor Plastic l I 13.5 0.15 13 1.816 1.58 Uooer/LowerAoltotor Beorlno Plastic l I 2.6 0.05 0.775 0.016 ·' 1.57 Upper Aoltotor Plastic l I 3.75 O.l 11.5 0.934 ' 1.85 Aaltator Clutch Assv '''·' 1.85 Anltator Clutch Assv 1.56 Clutch Bodv I Plastic I I l I 2.63 0.08 2.265 I I 0.052 I I l.55 Ratchet Stoos I Plastic I I 4 I 0.4 0.15 0.9 I I 0.016 I . ·. I l .54 Clutch Bottom Cover I Plastic I I 1 I 1.75 0.05 0.4 I I 0.006 I •· I Sub-Totals 22 13.50 10.79 Figure 3: Structured Bill of Materials 3.2 Fabrication Processes After each detailed BOMwas completed, the major manufacturing processes were identified. These processes are listed in Table 1. Table 1: Major Manufacturing Processes Fabrication Fixturing Stamping/Pressing (Large, Medium, Small) Brake Forming Cut &Shearing Machining Injection Molding (Large>1500ton, Medium 800-1500 ton, Small<BOO ton) Casting Finishing Washing Powder Coating Enameling Deburring Assembly/Joining Adhesive Bonding Spot Welding Seam Welding Integral Fastener (i.e. clinching) Other Fasteners Press Fitting Inspection &Testing Material Cost,$ $3.31 S0.04 $0.03 $0.02 $4.13 $0.29 $0.84 $0.05 $0.03 $0.07 $0.02 $0.0l $0.0l $0.82 $0.0l $0.42
$0.02 SO.Ol so.oo $10.12

Information on equipment and tooling costs, typical processing cycle times, and materials used for fabrication was obtained from the ADL manufacturing databases. Equipment suppliers were contacted for further details concerning equipmentcapabilities and processing parameters (cycle times, scrap rates, etc.). The fabrication process cycle times were directly entered in the BOMand linked to the specific parts being fabricated. Each part had a processing time and labor cost assigned based on an overall laborrate. Workshop Version 1.0 5DRAFT For this analysis $24.00was used as the average fully burdened laborrate based on typical yearly wages and benefits for union employees. Sensitivity analysis was conducted on this importantparameter and is presentedin Section 5.0. This parameter was investigatedbecause laborrates can vary considerably, depending on geographic location, availability ofskilled labor, and level ofunion representation. Figure4 contains an excerpt ofthe non-assembly processing times (seconds perprocess) associated with eachcomponent listed on the left. This section ofthe model has all the processes listed in Table 1, but for brevity a single page was presentedin Figure4. Figure 5 is from the equipment summary section, which includes total equipment and summarized laborrequirements for each fabrication process.
1.00 I I I ITub & Basket Assembly Manufacturlna Part Flnal as• 1388.00 Powder Enamel Large Medium Small Brake cut& No. Description 1800.00 F:lxtnrin., Wash Coatllll! B•l.tn.r Press l?ress Press Form Shear 1.01 Tub 1n.o 1.0 1.03 Water Level Box 5.0 1.02 Tub to Susoenslon Seal 1.07 Bleach tube l.30 Basket Assv 1.20! Basket I 40.0 I I I 4.0 I I 10.0 I 30.0 I 2.0 1.221 Lint Collector I I I I l I I I I 1.211 Basket Balanclna Rina w/Water In it 5.0 I I I I I 

## -. I 1.49 UooerAallaforAssv 1.SOA Fabric Dlsoenser - Too 1.SOB Fabric Disoenser - Cuo 1.50C Fabric Disnenser - Bottom

1.51 Clutch Cover 1.52 Clutch Cover Seal l.75 Lower AallatorAssv 1.60 Bottom Aaitator Bearlna 2.000 1.59 Bottom Aaitator 1.58 Uooer/Lower Aaitator Bear/no 1.57 UnnAr Aaltator l.85 Aaltator Clutch Assv f .85 Aaltator Clutch Assv 1.561 ClutchBodv 1.551 Ratchet Stoos 1.541Clutch Bottom Cover Sub-Totals 62.0 4.0 10.0 30.0 3.0 Figure 4: Fabrication Process Cycle Time Estimates

Manufacturlna 

# I I I Powder 

# IEnamell

Fb:turlno Wash Coatlnir Baklnll Large 

## I Medium

# I Press Preas Small 

# IBrake

## I Cut& 

# I Press Form Shear SecondsI 115.0 I 17.7 I 17.7 I 4.0 I 14.5 I 36.3 I 19.5 l 51.8 I 100.8 I #Stations Required I 9 

### I 2 

### I 2 

### I l 

### I 2 

### I 3 

### I 2 

### I 4 

### I 8 

### I #People/Machine! 1.00 

### I 1.00 

### I 5.00 

### I 5.00 

### I 1.00 

### I 0.50 

### I 0.25 

### I 0.50 

### I 0.50 

### I Actual #Operators Required! 9 

### I 2 

### I 10 

### I 5 

### I 2 

### I 2 

### I 1 

### I 2 

### I 4 

### I Equipment Cost/Station (Millions)

### I $0.01 

### I so.50 

### I $50.00 

### I $50.00 

### I $3.20 

### I $2.10 

### I $0.80 

### I so.15 

### I so.08 

### I Equipment Cost (Mllllons)I $0.05 I $1.00 I $100.00 I $50.00 I $6.40 I $6.30 I Sl.60 I $0.60 I S0.60 I Running Cost ($)1 I 0.2 I 6.6 I 3.0 I I l I I I Figure 5: Fabrication Process Equipment and Labor Requirements

6DRAFT In addition to the process time and laborcosts associated with fabrication, labortimes for assembly associated with each part are included.
3.3 Assembly Processes Inthe final step ofthe cost assessment, assembly times and associated direct labor costs were estimated. Assembly cycle times were primarily derived from reversing the· disassembly ofthe selected clothes washers. The assembly sequence was built into the structuredBOM, culminating with final assembly, testing and packaging. Once the costestimates for eachmachine was finalized, a detailed summary was prepared for relevant components, subassemblies and processes. The structuredbill ofmaterials and manufacturing process summaries provide detailed direct material, direct labor, indirect material, and investment costs. Indirect labor costs were estimatedby subtracting the direct labor hours, determined from the bottoms-up analysis, from the current average total laborhours perunit (1.8 hours). The current average labor contentwas derived from a top down analysis ofseveral household laundry equipment manufacturing plants and can be confirmed with datafrom the 1992 Census of Manufacturers. Although the 1992 Census would indicate an average laborcontent in the household laundry equipment segmentto be 2.1 labor-hrs perunit, we believe 1.8 hours is more accurate, as a savings of0.3 hrs perunit, or approximately 14% for the industry overthe past 6 years, couldbeexpected. The indirect labor-hourperunit was multiplied by the averagelaborrate ($24) in'orderto estimate the indirectlabor cost. The average direct labor hour perunit was 1.32 hours; therefore the indirect labor content was calculated to be on average 0.48 laborhours perunit. The indirect laboris included in the overheadestimate, along with indirect materials, utilities, depreciation, maintenance, taxes, and insurance. The direct labor cost total is approximately $32 per unit, while the indirect laborcosts are estimated to be $11.50 perunit at the fully burdened $24perhr laborrate.
4.0 Preliminary Results Table 2 presents a summary ofthe aggregated full production cost, builtup from material, direct labor and overhead costs, for the baseline vertical axis clothes washer. These costs havebeen aggregatedbased on the two machines that were dismantled.

Workshop Version 1.0 7DRAFT
Table 2: Cost components for Baseline Vertical Axis Clothes Washer Sub assemblies Material Direct Labor Overhead Full Production Cost Tub & Basket Transmission/Motor Suspension · Pumps, Controls, and Valves $16.12 $35.37 $4.33 $24.20 $5.93 $6.89 $2.40 $2.63 $12.04 $10.44 $3.94 $3.27 $34.08 $52.70 $10.68 $30.10 Cabinet $20.35 $7.41 $24.98 $52.24 Misc. & Final**Assembl~** $16.70 $6.53 $4.75 $28.48**llldllllilC~1lliBl¥illl~1!t~:~$;1~1l7,:!0.'Z~:~mlml;1[Ji11JR)0g'\flh!$3.n:!tt,9~~~;,#i;;t~r1~'.~~~S$~9i~2!~~;.'1Xri~''~~+** . ;•·$208'.28:::.:: : :. 

### I A detailed breakdown ofthe aggregated overhead costs and the key assumptions for each cost category are presented in Table 3. These costs are estimated based on the bottoms up cost analysis and typical values for the appliance manufacturing industry. Taxes are not directly related to a product design, therefore no changebetween the baseline and any higher efficiency washers is anticipated. Also, maintenance, utilities, and insurance are primarily related to equipmentquantity and cost ofinvestment and therefore are indirectly driven by product designs. We have included these costs to estimate the productioncost ofthe baseline but anticipate that variation with future higher efficiency designs will have a secondary effect on differential cost. Table 3: Overhead Cost of Baseline Clothes Washer Cost Category Indirect Labor Indirect Materials' Maintenance Utilities Depreciation Taxes Insurance $11.40 $19.09 $7.11 $3.54 $14.76 $1.87 $1.66 Cost Basis Teardown analysis Teardown analysis 4.0% of total capital investment 1.7% of material costs Teardown analysis 0.9% of full production cost 0.8% of full production cost 

### Although the overhead costs are slightly higher in this analysis than the top down industry analysis, much ofthis difference canbe attributed to the significantinvestmentin a greenfield site. The allocation ofdirect and indirect labor can also vary with any single company's individual practices. Fixed investments in equipment and tooling have been estimatedbased on the requirements derived from the component cycle times in production volumes. Production volumes, in conjunction with equipmentprocess times, will determine the number ofpieces ofequipmentnecessary and the plantinvestment costs. Forthe number ofpieces ofequipment, we have assumed an up-time of90%. Table 4 shows the aggregated investment for aproduction volume of 1.5 million units per year.

Workshop Version 1.0 8DRAFT
Table 4: Fixed Costs (millions) for Baseline Vertical Axis Clothes Washer

Subassemblies Equipment, Tooling Building and Total Investment and Installation Conveyors Estimate Tub & Basket $66.7 $18.2 $84.9 Transmission/Motor $21.5 $5.8 $27.3 Suspension $15.8 $3.9 $19.7 Pumps, Controls, and $4.3 $0.3 $4.6 Valves Cabinet $145.3 $43.8 $189.1 Misc. & Final Assembly $13.6 $4.1 $17.7**l110'.f~1M1•t~m11t:~,101BE~:m·~1~;'1Hs~~mt$~6?.021mr11i6n~'.~·,:e;~;;jiHll;rnJ;1i::i $i6.s1fillli1uQ11** E·:**~;1i~~;.i** ,..,. ··:$a'4s,s·:mi11iorr·' •...:: 

### ··J Thebuilding investment currently assumes 750,000 square feet at $100/sq. ft. and a multiplier of 1.6 (additional 40% for installation and 20% for auxiliary equipment) was used to calculate installation and auxiliary equipmentcosts. Wehave assumed that the depreciable life ofeachpiece ofequipment on average is 14 years and we used a simple straight line depreciation assumption to calculate the yearly amortized perunit cost. A sensitivity analysis to lowerequipment lifetimes is presented in Section 5.2. Forbuilding and conveyorinvestments we assumed 25 years and 20 years respectively for an average depreciation life. Thebuilding costs were allocatedby sub-assemblies on an equipment costbasis, not on a specific spatial requirement for eachpieceofequipmentor manufacturing process. The assumptions for investmentrequirements, capacity utilization and.planning and accounting practices can vary greatly, and.have a significant effect on the total investment and the depreciation element ofthe overhead costs. Because ofthis, these assumptions will be the subject offurther sensitivity analysis. Also wehave not included the cost ofcapital in the products full production cost, since this costis an interest which is considered in the estimate ofthe non-production cost. For future analysis, the methodology can apply a capital recovery factor (CRF) to the total investment in orderto estimate the yearly costofcapital, but at this time we have not included it in the baseline units full production cost. The full cost ofthe product, which includes SG&A, R&D, and interest costs (Figure 1), will be arrived at using the industry cost structure developed in an earlier study by Arthur D. Little. This previous study derived the cost structure from public data on the major appliance industry. Figure 6 is a percentage breakdown ofthe full cost ofa product, defined in Figure 1. This manufacturing cost assessment will estimate the direct materials, direct labor and overhead for abaseline unit which, according to the industry cost structure, represents approximately 74% ofthe full cost ofa product.

Workshop Version 1.0 9" '• DRAFT

R&D 1.8% Overhead

11.7%

10.2% Incomefrom Operations 6.0%

Material 52.0%

Figure 6: Washing Machine Industry Cost Structure Derived from Public Data 5.0 Variability and Uncertainty in Manufacturing Cost Since the current cost assessmentrepresents only a fraction ofthe baseline clothes washer products available, and the estimates have inherent variability and uncertainty, we have conducted**extens~ve** sensitivity and cost simulations to understand the impact ofthis variability and uncertainty on the baseline manufacturing cost. This analysis will provide us with a greaterunderstanding ofthe range ofprobable costs, and will help identify key costelements requiring further critical review and investigation. We used primarily two methods to analyze the variability and uncertainty in the manufacturing cost assessment:
• Sensitivity analysis is used to quantify the impact ofvariability and uncertainty for any one specific parameter.
• Monte Carlo simulations are used to understand the interaction and impact ofmultiple parameters. This analytical technique allows us to input a range ofdata with probability distributions and generate an estimatedrange for the baseline manufacturing cost with a quantifiable level ofcertainty.
5.1 Key Parameters Thephysical teardown and activity based cost estimation conducted on two actual clothes washers removes much ofthe uncertainty about materials, components, and manufacturingprocesses. Many ofthe manufacturing processes however, carry some variability basedon individual manufacturers and product differentiation. This results in some variation in the total capital investment, the utilization ofthat capital, maintenance costs, and equipmentuptime. Also average laborrates for different manufacturers can vary, thereby warranting the need for a sensitivity analysis to determine its impact on costs. Workshop Version 1.0 10DRAFT
In addition to the variability in inputparameters, a certain degree ofuncertainty accompanies the estimation ofmanufacturing process capabilities and equipment investmentestimates. The impact ofthis uncertainty is quantified by using sensitivity analysis. 5.2 Sensitivity Analysis Wehave conducted numerous sensitivity analyses and have selected the most appropriate and significantparameters that will impact full production cost. The sensitivity results are presented for both units. LaborRate The 1992 Census data for household laundry equipment manufacturers indicates an average fully burdened laborrate of$18 perhour while some union wages couldbe as high as $28perhr. Therefore, we conducted a sensitivity analysis on this parameterin orderto understand the impact ofthis variability.

$215.00**~** $210.00 ·;:**~** 

### ... CD .c 

### :a $205.00
== 0 0 0 CJ $200.00

$195.00

15 17 19 21 23 Costof Labor($/hr) Figure 7: Sensitivity Analysis on Labor Rate 25 27 29

The manufacturing costmodel indicates that a $17 to $28 laborrate variation would result in approximately a $20differential in full production cost.

Workshop Version 1.0 11· , DRAFT Capacity Utilization (Plant Output) Oneimportant source ofvariability is the utilization ofa plant'scapacity. Wetherefore consideredlowerutilization ofthe 1.5 million unitperyear greenfield plant outlined in this study.

$240.00

;;:- $230.00 c

### ~ 

# .. QI .r. :3 $220.00 :;:: 

### 8. iii 8 $210.00

$200.00

$190.00 +-------+----+-----1------+-----+-----'f-----l 800,000 900,000 1,000,000 1,100,000 1,200,000 1,300.000 1,400,000 1,500,000 Actual Output (Washers perYear) Figure 8: Sensitivity Analysis on Actual Plant Output Ifthe greenfield baseline clothes washer manufacturing plant operates at 60% ofits optimal capacity this would resultin an increase ofapproximately $12perunit.
Total Investment There is a considerable amount ofuncertainty in estimatingthe equipmentrequirements ofthe total plant and its total cost. We therefore conducted sensitivity analysis versus this parameter. In this case we have varied the estimate considerably from -50% to +400% of the aggregatedbaselinecost estimate of$267 million.

Workshop Version 1.0 12-.-- ' DRAFT

$225.00 $220.00 $215.00**~** $210.00**~** !ii $205.00 &. 

### .,**~** !ii $200.00 Q. ti 8 $195.00

$190.00 $185.00 $180.00 0% 20% 40% 60% 80% 100% 120% 140% 160% Investment Factor (multiplylng estimated equipment investment) Figure 9: Sensitivity Analysis on Total Investment Cost The x-axis represents a percentage ofthe baseline investment cost (equipment only) of approximately $230-300 million. Itis apparent from the sensitivity analysis that a large variation in equipment cost ($130 million to $1 billion) could have a significant impact ($80) on the full production cost, but within a smallerrange (

### +or- 25%) the effect is considerably less (

### +or - $4 perunit). EquipmentAverageDepreciationLife The depreciation life ofa piece ofmanufacturing equipment has been investigated, and there still remains a significant degree ofvariability between manufacturers. To understand the impactofthis variability, we conducted sensitivity analysis.

Workshop Version 1.0 13

### • DRAFT



# .. c $220.00**~** $215.00



### ... 

# ..**~ ~**  $210.00 

## 8

$205.00

IO 12 14 Average Depreciation Life (years) Figure 10: Sensitivity Analysis.on Equipment Depreciation Life 16

We assumed that the average depreciation life ofthe equipment could vary from 7 to 15 years, which translates into a costdifferential ofapproximately $10. Maintenance We assume that maintenance costs are related to the magnitude ofthe asset base.

212
210 

# - ·2 ;i 

### -=- 208 .! I'd ;: 206 Ci -; 0 0 204
202**200+-~~--+~~~-1-~~--i---~~--+-~~~+--~~-+-~~~-+-~~--1** 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% Maintenance as % of Depreciation Figure 11: Sensitivity Analysis on Maintenance
14DRAFT Ourcost assessment would indicate that within the range oftypical maintenance costs (2- 6% ofequipment investment) there is not a significantimpact on full production cost {approximately a range of$4).
5.3 Monte Carlo Simulation To evaluate the key parameters simultaneously and to understand the cumulativeeffects ofvariability and uncertainty we conducted a Monte Carlo simulation. This process generates random inputs within a prescribed distribution which then completes numerous iterations (1000) to quantify the range ofpossible outcomes and the probability ofeach occurrence. Forthe simulation we made the following assumptions: Table 5: Monte Carlo assumptions for Key Parameters

Key Parameter Probability Parameter Range Most Likely Value Distribution Labor Rate Uniform $17 to $28 per hour $24 per hour Plant Output Triangular 900,000 to 1.5 million 1.5 million Equipment Depreciation Uniform 7 to 15 14 Life Total Investment Triangular 50% to 150% 100% Multiplier Maintenance Uniform 2.5% to 5.5% 4% Equipment Uptime Triangular
..70% to 95% 90% Utilities Triangular 1% to 3.5% 1.7% Byrandomly generating values in the key parameters ofTable 5, a distribution offull production costwas generated as shown in Figure 12. Based on this analysis, Figure 12 shows that the variation in key parameters mentioned in Table 5 for washer manufacturing results in an aggregated baseline clothes washer cost between $196 and $237 with 95% certainty. This range represents a variation of +or- $20perunit (less than 10%). This analysis can be repeated for different ranges in the key parameters, alternative probability distribution functions and for additional parameters ifwarranted.

Workshop Version 1.0 15DRAFT
Forecast: Aggregated Cost 1,000 Trials Frequency Chart 2 Outliers .031 - 31
.023 - 23.2

## ~ .c .016 - 15.5 (ti 

### .c Cl

- 7.75 

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.008 

## a.
.000
- 0 $180.00 $197.50 $215.00 $232.50 $250.00 Certainty is 95.30% from $196.10 to $237.17 $ Figure 12: Monte Carlo Simulation of Aggregated Baseline Cost 6.0 Conclusion and Phase II Program Plan · Based onfeedback from all stakeholders, Arthur D. Little will conduct additional or alternative analysis on the baseline clothes washer. Finally we will initiate Phase IIto estimate the differential costs ofseveral higherefficiency designs relative to the aggregatedbaseline costdeveloped in Phase I.

Workshop Version 1.0 16

# .,,
.... C"D .Cl c: C"D 

# =**~**